Can the Nordstrom Family Outrun Retail’s Woes?

Many retailers, pummeled by online competition and shifting consumer tastes, are slashing costs and closing hundreds of stores.
Nordstrom
Inc.
JWN 1.65%
is doing the opposite.

The family-run company has been investing heavily as it tries to outrun the forces battering the industry. It is revamping some of its 122 department stores and spending more than $500 million to gain a toehold in Manhattan. It has snapped up e-commerce companies including flash sale website HauteLook and subscription service Trunk Club. And it has launched new concepts, including a store in Los Angeles called Nordstrom Local that doesn’t stock any clothes.

So far, those efforts have failed to pay off in rising profits. As Nordstrom has been ramping up capital spending, revenue for the six years ended in January 2017 increased by more than half to $14.76 billion, but profits over that period fell. Much of the revenue growth has come from opening Rack off-price stores and e-commerce. Sales at the department stores have declined each year since 2012. The company is scheduled to report results for its recently completed year on March 1.

Tired of trying to convince Wall Street that its invest-for-the-long-term strategy will generate results, the family attempted last year to take Nordstrom private. Although the effort failed when they were unable to raise enough financing for the more than $10 billion deal, the family restarted talks with bankers this year, people familiar with the situation said.

“About the worst thing that could happen is to be known as the generation at Nordstrom that screwed it up,”
Pete Nordstrom,
56, a great grandson of the Swedish immigrant who co-founded the company a century ago, said in a recent interview.

He shares the title of co-president with his brothers Blake, 57, and Erik, 54. Along with their father, aunt and a cousin,
Jamie Nordstrom,
they control a third of Nordstrom’s shares.

It’s a risky time for any retailer to pile on debt. Department stores are fighting uphill to retain shoppers who are migrating to the web and funneling more of their disposable income to dining out, travel and other experiences.

“Nordstrom is subject to the same pressures all department stores face,” said Paul Lejuez, a Citi analyst. Such stores are “at a disadvantage because they sell other people’s goods, and they are located in malls where foot traffic is down.”

Nordstrom says it’s different from its peers. It has fewer locations than rivals, and most are in the nation’s top malls, which continue to draw shoppers. “We like to think of ourselves as more of a specialty retailer,” said Jamie Nordstrom, the 45-year-old president of stores.

While other department stores are retrenching, Nordstrom has shown a willingness to take risks. It is jumping into the competitive New York City market with a men’s store in April followed by a women’s store next year. “We don’t have all the answers,” said
Erik Nordstrom,
who oversees e-commerce. “But we’ve been investing significantly against these changes.”

At a store in Irvine, Calif., Nordstrom recently completed a test of a showroom that carried samples of 19 brands such as Rag & Bone and Veronica Beard in every size and color; they could be tried on but had to be ordered online. For shoppers, it solved the problem of visiting a store only to find their size sold out.

“They’ve done a good job of merging online and offline shopping,” said Samantha Yarock, a 32-year-old in Portland, Ore., who says she’s a fan of a service Nordstrom introduced in 2016 that shoppers use to reserve goods online and try them on at their local store, avoiding the hassle of a return.

Other changes are smaller but meant to appeal to customers. In November, the company unlocked the fitting rooms in its department stores. Many retailers keep them locked to discourage shoplifting, but the practice annoys customers. Although theft has increased slightly since Nordstrom made the change, executives say, the retailer is sticking with the new policy.

“Analysts don’t like it,” Jamie Nordstrom said. “But I’m thinking about the next 50 years, not the next quarter.”

Nordstrom weeds out weaker-selling brands regularly, replacing laggards with new labels. The
Ivanka Trump
brand, which Nordstrom dropped last year, setting off a political firestorm and earning the ire of President Trump, was one such casualty.

“If you tell a brand, we’ll give you 500 square feet and you’ll guarantee us a gross margin, you’ll have a store full of things people don’t want,” Jamie Nordstrom said. Anywhere from 10% to 20% “of the stuff we carry won’t be here next year.”

The weeding out of poor performers is one reason Nordstrom offers fewer promotions than peers. While the company says it sells 90% of its department-store merchandise at full price, it is harder for Nordstrom to compete in a world where promotions are the norm.

The company says it combats the problem by selling labels that aren’t widely distributed. A third of its goods are either exclusive to Nordstrom or have limited exposure elsewhere, from Ayr jeans to Le Labo fragrances.

As of this year, the clothing label Vince can no longer be found in Bloomingdale’s and Saks Fifth Avenue, but is still available in Nordstrom, one of the few department stores it continues to sell to.

Nordstrom currently is ripping up carpets and fixtures that divide the stores into departments. The goal is to make the space more flexible and switch out merchandise categories that aren’t working, said Dawn Clark, the senior vice president of store design.

While analysts applaud these moves, some worry they aren’t enough to prevent Nordstrom from going the way of other defunct department stores. The flagship Nordstrom in Seattle is in a landmark building that once housed Frederick & Nelson, a chain that went bust in 1992.

“They are doing all the right things, but it’s not clear how it will shake out,” said William Dreher, an analyst with Susquehanna Financial Group.